Economic Substance Regulations(ESR) Dubai, UAE was brought out via Resolution 31 of 2019 in April of the same year. The Economic Substance Regulation serves as a guideline for improving the nation’s tax frameworks and will make companies more accountable for maintaining an economic presence in the UAE.
The Economic Substance Regulations(ESR) ensure that all eligible Onshore and Free Zone entities will demonstrate adequate economic presence within the UAE. Let us now take a closer look at the Economic Substance Dubai guidelines, and why they are so useful.
- Security and Confidentiality
- Cost-Effectiveness
- Evaluates Risks and Protects Assets
Why has the UAE introduced Economic Substance Regulations?
The UAE introduced the Economic Substance Regulations to reiterate its commitment towards the OECD Inclusive Framework, of which it is a part. ESR in UAE came out as a result of the assessment the country underwent by the EU Code of Conduct on Business Taxation.
Introducing the Economic Substance Regulations UAE helped the country get off the EU blacklist regarding taxation. The Economic Substance Regulations Dubai also helped the country improve its taxation infrastructure and prevent companies from exploiting loopholes to avoid taxation.
When did the economic substance regulations enter into force?
The UAE brought into force Economic Substance Regulation UAE via a Cabinet of Ministers Resolution on April 30th, 2019. The government further released a Ministerial Decision containing guidance on how to apply these regulations on September 11th, 2019. After consulting with the EU and OECD, the UAE made amendments to the ESR in UAE.
These were brought into force via a Cabinet of Ministers Resolution on August 10th, 2020. Additional guidance regarding the amendments came out through a Ministerial Decision, which was the 100th of the year. The ESR compliance UAE received a broader definition through this Amended Guidance which had a detailed guide on the Relevant Activities for ESR.
Who are the Regulatory Authorities?
- Federal Entities or Regulatory Authorities
- Ministry of Economy
- Central Bank
- Insurance Authority
- Security and Commodities Authority
What are the Relevant Activities?
The Relevant Activities as per the Economic Substance Regulations UAE are businesses which
engage in the following activities:
- Banking
- Insurance
- Investment Fund Management
- Lease-Finance
- Headquarters Businesses
- Shipping
- Holding Company
- Intellectual Property Businesses
- Distribution and Service Centre
UAE businesses which work in the sectors mentioned above must use Substance Over Forms
to determine whether they are eligible for the ESR guidelines. To do so, businesses must
assess all the activities they performed in one financial year, and not just the ones mentioned on
their commercial licence. Also, as per the Economic Substance Regulations UAE, businesses need not be actively engaged in these categories to be eligible for ESR.
Even a passive income through a finance lease makes the business liable to follow ESR in UAE. ESR compliance UAE mandates that businesses who carry out multiple relevant activities must demonstrate economic
substance for each one. In some cases, ESR in Dubai allows companies to consolidate their ancillary Relevant Activities to prevent multiple or duplicate reporting.
Who is a Licensee?
A Licensee is any juridical person, or unincorporated business or partnership registered and eligible for ESR in UAE. Hence, it includes all individuals, persons, and partnerships that engage in a Relevant Activity in the UAE. Hence, as per Economic Substance Regulations UAE, a License may be any one of the following;
- Limited Liability Company – LLC
- Private Limited Company
- Public Limited Company
- Joint Venture Company
- Partnership Firm
However, as per Economic Substance Regulations Dubai, the following persons do not fall under the category of Licensee;
- Natural Person
- Sole Proprietorship
- Trust
- Foundation